Global Economics

China Milk Nurtures Success

Capitalizing on China's growing taste for milk, the dairy company bought 970 head of cattle—before the ban on imports of U.S. and Canadian beef

The outbreak of mad cow disease in Canada and the U.S. in 2003 knocked the North American cattle industry on its back. The largest importers of U.S. and Canadian beef, including Japan, South Korea, and China, banned the import of beef from North America. But for China Milk Products, the restrictions proved to be a blessing in disguise. The privately owned raw milk company had already purchased 970 Canadian Holstein cattle. Its state-owned rivals failed to import as many cattle because they had to navigate government bureaucracy to get bank loans. Today, China Milk owns the largest herd of Holstein cattle in China and ranks 50th in BusinessWeek's annual Hot Growth rankings of Asia companies.

Liu Shuqing and five partners started China Milk in the summer of 2001 to produce raw milk, after recognizing China's demand for milk was outstripping supply. As Chinese families become wealthier from the booming economy, more parents are buying milk for their children. China traditionally has not been a milk-consuming country, so local cows were not bred to maximize their milk production until very recently. Chinese dairy cows produce roughly four metric tons of milk per year, about half the yield from U.S. and Canadian Holstein cows.

Monopoly on Bulls

To narrow the gap in production, China Milk began importing Holstein bulls and cows, first from Canada and then, after the import ban, from Australia to breed with Chinese cows. At the same time, the Heilongjiang Province-based company also set up embryo-transfer and semen-extraction facilities to breed cows producing greater yields of milk. Once China banned North American cattle, China Milk cornered the market on bull semen and cow embryos from Canadian Holstein cows in China.

"We used to love the import ban because no one [could] compete with us when we started in the industry," says Martin Choi, chief financial officer for China Milk. "But right now, we really want the import ban to go because it's stopping us [from importing] the cows."

Any rancher wanting to breed his cows with a Canadian Holstein has to go to China Milk. The company charges its customers $9.50 per sample of bull semen from a Canadian Holstein, compared with $6.75 from Australian Holsteins and $2.70 from Chinese Holsteins. However, Chinese ranchers are still willing to pay a premium for Canadian Holsteins, especially after receiving a little help from the government.

Starting this year, the Chinese government is giving Chinese ranchers a subsidy of $2 toward each sample of bull semen. The sale of bull semen accounted for more than three-quarters of China Milk's sales this year. The company's revenues have gone up more than fourteenfold, to $57 million, while profits have risen more than elevenfold, to $51 million this year, since 2003.

Persuading China to Lift the Ban

China Milk's virtual monopoly on North American Holsteins won't last forever. American and Canadian trade negotiators have been trying to persuade their Chinese counterparts for years to lift the import ban. The restrictions were originally supposed to be lifted in 2007, but several more cases of mad cow disease were found in Canada and the U.S. this spring.

China Milk Chief Executive—and son of the company founder and executive chairman—Liu Hailong now expects the ban to be lifted in late 2008 or early 2009 at the earliest. "Once they lift the ban, we will probably import the first batch of the best bulls and cows from the U.S. and Canada to China. Our other competitors will still be far behind us and won't pose a threat," he says.